I received many comments about my last two posts on the Fair Tax Plan. They've given me a lot to think about. But as the saying goes, "If it sounds too good to be true, it probably is". I'm still not sold.
I still can't accept that this tax system allows everyone pay fewer taxes than they were before (unless you're a babysitter, snow-shoveler, tourist, or druglord) and still have enough internal revenue.
I think, if enacted, this tax system would lead to a much larger black market than currently exists in the U.S., one that will be used most exclusively by the incredibly wealthy. People with connections could find tons of ways to evade tax on new goods, like animals and electronics. Most people could find ways to avoid paying taxes on services like construction, gardening, painting, etc. How will the government know if taxes are being paid accordingly; these types of things can't be audited.
Under the current tax system, if you are a teacher and you buy supplies for your classroom, you can deduct the taxes paid on those items and reclaim the taxes you paid on that money. Under the "Fair" Tax Plan a teacher doesn't have a way to get back the taxes she paid on those items, or not pay those taxes in the first place.
If there's no IRS, like it suggested under the "Fair" Tax Plan, who calculates and sends out the prebates each month? How will the government know if anyone is avoiding paying taxes?
The government under a Fair Tax sytem will be much less inclined to break up monopolies like Microsoft. A monopoly is able to maintain high prices because they have an almost exclusive market for a good or service. Higher prices mean higher taxes, and more revenue for the goverment. Same goes for higher gasoline prices.
So, I still have issues with the Fair Tax Plan and I'd appreciate if you all can address them.
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From my last comment on Part 2, those websites are
www.fairtaxblog.blogspot.com (this is where the excellent information is about the tax base, consumption or income), www.fairtaxblog.com, www.wikipedia.com/fairtax, www.fairtaxreform.blogspot.com, http://us4fairtax.blogspot.com, http://chadsargent.blogspot.com.
About the black market: There have been studies relating to this question, but I, personally cannot point you to them. However, just remember, any evasion would require two parties, both of which would take huge risks for the stiffer penalties under the FairTax system.
Businesses, including teachers do not pay sales taxes on items that are bought for their business. It would be much like the sales tax exemption that they currently get, locally.
The enforcement of the tax system will fall under the rule of the individual states. For that responsibility, the federal government will pay the states a fee for the responsibility. The prebate is already calculated based upon the poverty level. The poverty level is calculated by the Health and Human Services. The poverty level is used to be more fair than exempt certain items that some people need and some people don't.
I think your example about monopolies may have an underlying truth, but come on. I think that is too conspiracy-minded. The tax authority does not have any say-so in an antitrust lawsuit. Base gas prices aren't regulated by the government as some would suggest, so that is just a stupid argument and has no relevance. If you want lower gas prices, start by insisting that the government stop taxing us at the pump, as exise taxes. The taxes are the biggest component of the price of gas, by the way.
I wasn't aware that teachers were business people, but besides that, how do they prove to the person at Staples that they are a teacher and therefore tax exempt? Because, unless I'm misunderstanding, not paying the sales tax has to happen at the register, because there's no IRS to mail you a rebate.
As far as my conspiracy-ness over monopolies, look back in U.S. history at pre-anti-trust law America, when Rockefeller was bailing the U.S. government out of debt. Don't underestimate the power corporations over a government.
Common sense is as rare as genius. ~Emerson
At sam's club, if I buy items that i plan to resell to customers, I can buy those items sales-tax-free, since I as a retail business am required to collect state and county sales tax from my customers.
In order to do this, there is a tax-exempt form I fill out at Sam's Club. They verify the accuracy of the information with the local government. Then, at the register, I tell them which of my purchases are to be exempted, the cashier verifies my form is on file, and I do not pay sales tax on those items.
This works anywhere that business purchases are made. Most school supplies used by teachers are not purchases at the retail level anyway, so a retail sales tax would not be an issue with those purchases. The difference is that the embedded tax bill that is currently built into the wholesale price would be gone, so teachers would simply pay less for those items, as long as they are purchased above the retail level.
If the teacher needs to purchase at the retail level, They would have the tax-exempt form on-file.
I was not aware that they do not pay local sales tax currently. Usually that exemption is just for people who resell the items. Interesting.
Where did you learn about this tax-exempt form, because I couldn't find any information on this? And its not that teacher don't pay local sales tax currently, they get a deduction on their taxes.
Common sense is as rare as genius. ~Emerson
Keep in mind here that I am speaking of State and Local Sales tax, not Income tax or the FairTax.
I have a Sam's Club business membership, because I own a small business. When I got my membership, I was asked if my purchases would be tax-exempt. (Most of mine will not be because they are mostly office supplies and electronics which I don't resell, but there are lots of businesses which have most of their purchases that are resold to their customers.) I don't know about the warehouse clubs where you may live, but the Sam's by my place has signs at each register that say something like, "If your items are to be sales tax exempt, you must have a sales-tax-exempt form on file with Sam's Club."
Think of a tiny, family-owned restaurant. Most of their purchases at Sam's will need to be sales-tax exempt, since they are required to charge state sales tax for basically that same item when they sell it at the retail level. If those items were not tax exempt when purchased wholesale, then they would be double-, or even triple-taxed.
The person in the post I was replying to made it sound like teachers don't even pay state sales tax at the register, which I'm not too sure about. I know that they get to write the entire purchase off, including the sales tax, though.
With the FairTax, I think that they would have a similar form on-file (probably under the school system's name or account number, etc.) so that they would not be subject to the FairTax either. But for normal school supplies that they need for their class, I believe that the school would purchase those. And when schools purchase supplies, they do not purchase at the retail level, so they would not be subject to the FairTax for that reason.
I hope that I have clarified. Let me know if I did not.
Sorry, yeah, your previous comment was confusing. I thought you were talking about what it would be like under the Fair Tax Plan, but you were really just talking about your Sam's Club membership. Thanks for clearing that up.
Common sense is as rare as genius. ~Emerson
It could work basically the same with the FairTax. People who are buying goods at a business (like Sam's) for the purpose of reselling would only pay the true price of the product. Just the 77% of the sticker price. The FairTax on that item would be collected when the item is sold retail. That kind of item is usually known as a Transitional Good, since it is being purchased by someone who is not the end consumer. When the consumer buys it, it is called a Final Good (or Service), and then and only then will the FairTax be collected.
Teachers and the like would most likely work the same way. Except that the FairTax on their items is never collected, just like how it works now, where the money they use to purchase is ultimately not taxed.
...is that if you're buying on behalf of your business under the FairTax, you'd pay the tax at the point of sale and recoup it by filing a claim, using your business ID number and the business ID number of who you purchased it from. This will create an auditable trail of tax-exempt purchasing with two parties to every transaction.
...tho I could be wrong on that.
The way you describe it working is the way I think it makes the most sense. But who runs this claim-filling thing?
Common sense is as rare as genius. ~Emerson
Each state has a tax office (not the IRS) currently. They would be compensated with a commision of 0.25% of the FairTax collected to just do what they already do, just more of it. They would also do the claims and the policing. That's job creation! Also, forgot to mention earlier, the retailers would also be compensated 0.25% to collect the FairTax.
Either you have a "play book" of responses or you are a very good critical thinker. I'll assume the latter.
What you are doing is a good thing; I wouldn't want the FairTax (or any other major tax change) passed without such analysis from many Americans. Suffice it to say that nearly every contingency you can bring up has been discussed, usually ad nauseam, before. You can go tit for tat, though, posting a short series of concerns every day and (as you noticed) many FairTax faithful - regular people, not paid consultants mind you - will dutifully respond.
The first commenter gave you a few links to search for answers. Another very good source is FairTaxGroups. The black market question and others you pose have been discussed there multiple times before.
I'll *try* to summarize the black market argument. They arise for two reasons: a prohibition on a good or service (alcohol in the early 20th century, prostitution now) or a wide tax disparity between close regions. The first is irrelevant and the best example of the second is cigarettes, which are taxed at widely disparate levels throughout the country. For a black market operation to be successful the tax differential must be great enough so that the transportation, protection, and distribution costs do not erode so much of the differential that there isn't reasonable profit yet.
Furthermore, due to the higher risk nature of illegal activities, the black marketers will require a higher profit margin to compensate for the risk of jail time. In the case of cigarettes, there are some jurisdictions that charge nearly double the cost of a pack in taxes, while other places charge close to nothing. That leaves a lot of room for organized crime to engage in the process of purchasing, transporting, protecting, and distributing the product with enough money left over at the end to justify the increased risk. The FairTax rate of 23% does not offer enough room to make black markets profitable and the government could always levy stiff fines for large scale tax evasion operations, which would further erode the attractiveness of black markets (by increasing the risk premium).
The mechanisms for ensuring compliance under the FairTax are far less intrusive on the average citizen than the income tax's: audits (aka witch hunts). First, as others have mentioned, the FairTax involves two parties, a buyer and a seller, who must conspire to cheat, while you can cheat on your income taxes by yourself. The business to business compliance mechanism is relatively simple and leverages using information businesses already track: purchases and sales. If a business purchases something tax free for use in the making of a product they must give the company they purchase the good or service from their tax ID. The government can track all tax free purchases made by that business and then monitor their taxes remitted. Gross understatement of taxes collected will raise a flag. Periodic audits will keep any gaming of the system in check.
It should be noted that individuals are far more likely to cheat on taxes than businesses. Individuals are responsible for 80% of underpaid taxes under the income tax. Businesses have a disincentive to cheat because getting caught would adversely affect not just you, but other employees and owners. Most people aren't willing to take that risk to help a company.
As far as the monopoly thing, your logic damning the FairTax also damns the income tax in equal parts. If a company like Microsoft is able to gain monopoly status and charge high prices then their income will go up, while their costs remain relatively constant. They will pay higher income taxes as a result.
I'll be the first to tell you that the FairTax isn't perfect. No scheme can be concocted for the government to take your money without (or with) your consent that will be perfect. I like to say that you can't judge the FairTax in a vacuum. For all the FairTax's blemishes, the income tax has FAR more. Some think the super wealthy can avoid the FairTax. Guess what - they avoid the income tax now. Some say that the FairTax is hard on the middle and lower middle classes (which I, by the way, belong to). Just think how many people from that demographic go to local or national tax prep agencies to PAY to figure out how much they owe, only to have those places rip them off and offer them "services" such as super high interest "instant rebates" to placate them until the refund comes in.
Brian LeCompte
Flashpointblog.com
I don't appreciate what you're excusing me of. I apologize for the fact that I, apparently unlike you, do not know everything there is to know about the Fair Tax Plan. And I thoroughly appreciate all the comments I've received from everyone, you included, because I've learned more about this tax plan in the last few days, than I ever would have been interested in learning on my own.
Common sense is as rare as genius. ~Emerson
You're upset that I called you a critical thinker??? Where I come from that is a compliment. It's a hell of a lot better than blindly believing or not believing something.
Learning involves both research and discussion. I was merely suggesting that there are alternate places to learn about the FairTax that might involve less "ask and wait" effort since others may have asked and had answered the same questions.
Brian
It sounded like you were accusing me of making multiple posts about a single subject for the sole purpose of collecting more coments and reads on my blog. It also sounded like you were accusing me of wasting people's time when you said that every single question I'd asked could be found by scouring the links posted in all the other comments.
I think it was the general tone that made it sound like you were insulting me.
Common sense is as rare as genius. ~Emerson
For those who have not, please read "The World Is Flat" by Thomas L. Friedman. This book provides in detail why the switch to a consumption tax is imperative.
It's not news that jobs are moving off shore and that the United States is running a trade deficit. If this economy is truly becoming global we cannot continue to embed the cost of our government into the products we try to sell abroad.
When you tax the income of the workers you are taxing the products and services they make or provide. This embeds that tax (the cost of our government) into the price the manufacturer must ask for the product. Most other governments, especially those who are successful in the world market, have moved that taxing to the point of consumption. The internet sales sites for European companies list 2 prices, the first includes taxes and is the price a resident of the EU pays. The second, lower price is the price outside the EU. Why? Competition! Other governments do not expect US residents to pay the cost of their government, but because of our tax structure we do. The only way to remove that cost from exported goods is to tax those products at a different point in their life cycle as most other countries do.
I'm actually very interesting in reading that book, I just haven't made a point to go out and get it.
Common sense is as rare as genius. ~Emerson
The book is not an "easy read" as most history based texts, but it allowed me to understand what parts of an economy are in jeopardy of being globalized and what are not. It drives home just how serious other nations are about making a place in the global economy. For example, one city in northern China has 22 colleges and universities. Of the 200,000 students more than half will graduate with a science or engineering degree. And how college graduates in India work 72 hours a week in a call center for the equivalent of $500.00 per month.
Your concerns are valid, luckily the authors of the FairTax were thorough and they did consider these things.
First, you suggest the only people who are going to pay more in taxes are "baby sitters, tourists, snow-shovelers, and drug lord." But this is not the majority of evaded taxes. The "black market" of income tax right now is immense - in other words, income that is currently being earned but not reported to the federal government (and thus not taxed). Given only 24 million retail sales tax returns will be tracked under the FairTax instead of the current 140 million personal and business income tax returns, and will be tracked by no less than 45 current State tax collection systems all of which have been proven year after year to be effective, finding those that "cheat" will be much easier than the current IRS system. In addition, economists estimate approximately 80% of taxes will be collected from 20% of retailers, the largest retail corporations - these businesses are not interested in risking their capability to do business, and since compliance will be such a breeze compared to our current expensive tax system, they will be willing tax collectors.
Our current system has broken down to the point tax returns are actually being sent out of this country to be processed, and delinquent tax returns by the 1000's from past years have been marked "closed" because they are too expensive to collect on. The idea of FairTax producing a larger-than-current black market is simply not feasible, especially when one figures the penalties a business would risk by violating federal tax law. Since it would be relatively clear cut legislation, there won't be much in the way of "interpretation" - either businesses are following the law or they are not.
In terms of monopolies, the FairTax legislation does not repeal any anti-trust laws, and it does not prevent normal market forces from taking their normal effects. Whatever role the government will play in being hesitant to enforce anti-trust laws, it will be nothing compared to the fleecing we undergo in order to comply with the current tax system. Hundreds of millions of dollars are wasted each and every year by individuals and businesses to comply with our tax system, dollars that could be used to do something productive within our economy, or save for retirement, or for education.
If you're curious about just how dramatic some of these tax compliance figures are, or how dramatic income tax evasion really is, I would strongly encourage you to pick up a copy of The FairTax Book. Now you probably are not a fan of the author, Neal Boortz, I'm not either, but he does a pretty good job of not getting partisan in this book. Regardless, what it does have is a lot of great facts about our tax system and how much it is really costing us. We have all become so used to dealing with it that it's easy to forget what a colossal waste and drain on our country it really is.
Tell you what, I'll send you a copy on my dime. If you want, send me an e-mail to philez2000@yahoo.com with your mailing address, and I will send you a copy of the FairTax book, and delete your information directly thereafter, no strings attached. The only thing I ask is that you read it! :)
Let's make April 15th just another day!
Thanks for the generousity, but I could just as easily borrow it from the library.
When I talk about cheating on your "Fair Taxes", I don't mean by businesses, because I know that established businesses are relatively easy to track. I mean cheating by the individual, or by small self-owned businesses like painters, plumbers, locksmiths, etc. I know in the scheme of things, compared to all the people evading taxes blah, blah, blah, it doesn't matter, but it's a point I felt important to bring up. I have a hard time settling with the "Nothing's perfect" excuse.
Common sense is as rare as genius. ~Emerson
There will always be people who try to cheat the system in one way or the other, but most of even the smallest businesses are not going to be willing to risk their livelihood on getting a few extra bucks. Given that we will never have a tax system that is perfect (can we agree on that?), our best shot is to formulate a system that makes it more difficult to cheat. Because the FairTax will require at least two parties to cheat (whoever sells the good and doesn't forward the tax to the government, and/or the willing person who buys it without paying the tax), that's going to cut down on a lot of the incidence of cheating. The majority of Americans are simply not willing to violate federal law, and the FairTax makes it more difficult for those who are willing. And even if these people cheat on a purchase or two, the majority of their personal spending is going to be in normal retail locations where they will pay tax like everyone else (unlike our income tax system where evaders get away with paying little or nothing).
The biggest new source of revenue would be from those who are currently evading taxes LEGALLY through various legislative loopholes, many of them quite wealthy. They go through incredible financial gyrations to ensure that they DON'T break federal law while still paying as little tax as possible. With the FairTax, that whole game comes to an end.
Let me know if you have trouble finding the FairTax book at the library, it can be a popular item!
Just as a side note, I love how you say that the majority of people aren't willing to break federal law. Every teenager who illegally downloads or shares music breaks federal law. Sorry, I just find it funny, no ill-will intended.
Common sense is as rare as genius. ~Emerson
I would like to compliment you and all those who responded
for excellent explanations to excellent questions!I am a Fair Tax supporter because it is indirect,progressive,Constitutional, and will be the mechanism that
eventually will control government spending. When passed it will initiate the process of repealing the 16th Amendment authorizing the income tax. The current bill HR-25/S-25 has broad support from all except K street lobbyist who earn more than 50% of their income from their efforts to manipulate the income tax code for their clients. The only thing that can defeat this movement is apathy.
Are you familiar with the expression, "Where there's a will, there's a way?" That is true of all illegal activity and it is true of tax evasion, even under our existing system. Some statements of fact:
1. No tax law, even the Fair Tax, is 100% evasion proof. SEE, current estimates of the income tax gap.
2. No tax law, even the Fair Tax, can mend the fundamental flaws of human nature.
3. Every Tax can be audited, even the Fair Tax.
Let's address some specifics: No one has been able to provide any evidence that evasion under the Fair Tax will increase over that which occurs under our current system. SO, when you raise the specter of a thriving black market, I ask you, what evidence do you have that it will be any worse than what we have today?
Anecdotally, as compliance with the tax law becomes easier, I believe more will comply. It will simply become easier to comply than not, because NOT complying with the law will require collusion between at least two people. Under the current system, no such collusion is required. Income is understated, deductions overstated.....and no one is the wiser unless the tax return is audited.
It is unreasonable to expect a mere tax law can or will change human nature. Just as gardeners, babysitters, snow shovelers, etc pay no tax now, it is unreasonable to expect those who employ them to pay tax on those services. It just ain't gonna happen. BUT, under the Fair Tax, when those gardeners, babysitters, snow shovelers, painters, whatevers TAKE THAT MONEY TO THE LOCAL STORE........it will be taxed.
Second, legitimate service businesses, (Gardeners, landscapers, painters, beauticians, etc.) like any other business, from time to time will need to go to banks and other lending institutions to obtain loans. IF their books show no appreciable income from services rendered, then no bank on the planet will give them a loan. There are plenty of reasons to keep books of account which accurately reflect business activity. Those books will be audited by the states with regularity. In my state, sales tax accounts are audited on a rotating basis...and audits are certainty, not a possibility. Those are the same people who will be charged with auditing and collecting the Fair Tax. The valid business reasons to keep accurate books will ensure that the Fair Tax is collected on service businesses.
As to who will be responsible for administering the Prebate......that would be the Social Security Administration. They currently keep track of everyone who has a valid Social Security Number. Just as they currently calculate and distribute monthly Social Security checks, they will be charged with the responsibility of calculating and distributing the Prebate.
NO TAX IS PERFECT, even the Fair Tax, but it is orders of magnitude better than our current system.
1) under the FairTax, fewer people will have the opportunity to cheat on their taxes.
Today, each household files at least one return. The last count I recall, the IRS processed 119M returns each year.
Under the FairTax, instead of 119M returns to process each year, there will be ~29M retail points of sale.
This not only greatly reduces the number of people remitting taxes, it simplifies the enforcement problem: there's significantly fewer remittances to audit, and the audit can be done with 4th grade math.
2) Interestingly, the majority of non-compliance today is deemed to be simply due to not understanding the tax code, or math errors. Consumption taxes, by comparison, are often automated- done by computers at the point of sale.
As has been noted, people cheat on their taxes and there's not a lot that'll thwart the determined. The FairTax is better than the current system with regard to compliance in that it tempts fewer people (by putting fewer people in the position to deliberately fudge or unintentionally flub their taxes, and in that it will be easier to audit and enforce.
Antitrust
I don't see how under the FairTax there'd be any more or less inclination on the part of the government to enforce antitrust law than under the current system. You suggest that high prices mean high tax revenue and therefore, antitrust law won't be enforced? The same argument could be made under the current system: that high income being made by monopolists means high tax revenue- and yet, antitrust law is enforced (note that Microsoft has paid trillions in fines and and even today operates under compliance monitoring as part of its settlement).
btw, the classic problem with monopolies is not that they keep their prices too high- to do so invites competition for fat margins- it's that they keep their prices too low, preventing competition from being able to enter the market and make a profit. The concern is always that once there's no competition, they'll hike their prices, but in order to get to that point, the usual anti-competitive behavior is to keep prices artificially low.
In any case, that's neither here nor there- my point is that shifting from income tax to consumption tax won't change the motives of the government, nor will it change antitrust regulations.
esuffern,
Why is it difficult for you to see the obvious........everyone will pay less in taxes under the Fair Tax???? At present, many escape and pay no taxes at all on income. The honest people are paying more to make up for the EVADERS who escape paying. Under the Fair Tax, NO ONE escapes.....so taxation is spread-out among many more people and all pay less as a result. Tourists, criminals, EVERYONE!!!!!!! pays at the cash-register check-out stand. Why would that be hard to understand?????????
Best Regards,
John Paul McDaniel
Where we'll *really* end up saving is in indirect taxation.
The FairTax is a revenue-neutral proposal- it will generate the same amount of revenue for the government as the current system. This means that collectively, we'll be paying the same in terms of direct taxation- and more people buy stuff than pay income taxes today. This is how we can say that each individual taxpayer can pay less without the whole ending up paying less.
Indirect taxation is what happens when we tax business. It then passes those taxes along to others- to customers, in the form of higher prices, to employees, in the form of lower wages, and to owner (or shareholders) in the form of reduced profit or foregone capital investment.
When we tax businesses, we mandate that in addition to doing what they do, they must also collect and comply with some complicated tax law. This is expensive.
It is estimated that between 22% and 29% of the price of anything you buy is this cost. This is 'rolled in' to the purchase price, not represented as a tax, but in reality, it is a tax, paid by you, in the form of higher prices- and it is administered by businesses, because they are required to by law. Ironically, the more profitable the business, the more cost it must pass along to you, because it (and therefore you, its customer) pays a higher tax rate.
In the end, repealing income taxes and enacting a revenue-neutral consumption tax probably won't dramatically reduce the amount you pay in direct taxation. The dramatic improvement will come when as a nation we're not paying 22-29% of every dollar we spend on taxes, after we've already paid our own taxes.
Gosh, you don't have to get all crazy on me. For all you know, I'm faking like I don't like the Fair Tax Plan, for the sake of debate.
Common sense is as rare as genius. ~Emerson
That's awesome, esuffern!! I loved that response!
Keep us on our toes!
LOL
If you truly are doing this "for the sake of debate" it has been a very good exercise. But games like this is not what we need. FairTax (HR 25) has only one chance to become law and that is through volume of correspondents to legislators. We must convince our members of congress that opposition will cost them their seat. That they will be replaced by someone who does support the FairTax. The only means to accomplish this is to communicate with your legislator. When a sufficient number of their constituents demand the FairTax they will comply because the most important thing to them is re-election.